2HRS2GO: Oracle pendulum swings back too far

COMMENTARY--Dear Oracle shareholders: Thanks for overreacting to today's downgrade by Lehman Brothers analyst Neil Herman.

You've done a smashing job so far. Oracle (Nasdaq: ORCL) shares were down more than 9 percent an hour after the regular session opened this morning, after Herman's report was released.

Some of your sell-off was probably tied to the general market downturn today. After all, the Nasdaq composite index has fallen almost 4 percent as we speak.

But let's be honest. You folks used Herman's report as an excuse to cash in after watching your stock rise steadily for several sessions.

It's a natural reaction, and one that Herman himself suggests when he points out that Oracle's stock price rose 42 percent over the last two weeks. "Valuation (is) on the high side given near-term risks," the Lehman analyst writes in downgrading Oracle to "buy" from a "strong buy" rating.

Herman calculates that Oracle is currently valued 34 percent or 87 percent above its average for the past five years--excluding the tech stock bubble of November 1999 to February 2001--depending on whether you measure the stock on price-to-earnings or price-to-revenue. Sounds mighty expensive, doesn't it?

Yet keep in mind that these valuations are based on estimates for the next four quarters. I don't know if that's a terribly stable figure to use, because no one really knows what's going to happen over the next several months. All earnings forecasts by Wall Street analysts are guesstimates these days, thanks to the economic flux.

OK, you say, forget valuation for a moment. Herman raised some real concerns about Oracle's business.

He believes the company's near-term business will take a hit because several major deals that didn't close last quarter might not get signed this quarter, or may be reduced in scope. "We doubt that Oracle is likely to feel relief in the May quarter or even in the August quarter," Herman writes.

Adding to the worry was the latest quarterly report from Sun Microsystems (Nasdaq: SUNW), which sells a lot of servers specifically for Oracle's software. Lehman Brothers expects Sun's product revenue in the current quarter to fall 23 percent year-over-year. Herman points out that Sun's bookings tumbled to $3.6 billion from $5 billion.

At the same time, international business--normally a source of strength--could hurt Oracle as the economic slowdown spreads around the world.

Individual products could be threatened as well, Herman said.

IBM's latest database product appears to be better and more robust than ever, and IBM (NYSE: IBM) is selling it at a competitive price. And Oracle's customer relationship applications don't seem to be making much of a dent in the market leadership of Siebel Systems (Nasdaq: SEBL), which recently reported a stronger quarter than many observers expected.

You sellers can no doubt recite all those worries, as reasons to justify your departure from Oracle's ranks. Now here's a question: So what?

Assume that all of Herman's economic fears are valid. Oracle might not make the quarter. The overseas economy is getting worse. Sun's hardware sales will tumble like a barrel going over Niagara.

It all adds up to: The tech market will look weak for the next few quarters. This isn't news. It doesn't even qualify as recent history.

If you've been paying any attention over the last four months, you already knew this year was going to be lousy. Hopefully you've already written the year off and are looking ahead.

And let's assume that Oracle does face threats from Siebel and IBM. Hello? Siebel has been the market leader in customer relationship management for years, but CRM is a big field. There's room for more than one. And as for IBM's DB2 database software putting pressure on Oracle--we've heard this one before.

Even Herman is hedging his bets:

"We believe Oracle is a great company that is likely to continue to dominate a database market which we believe could well grow at the low double digit range over the next several years...Oracle does appear to be gaining traction in the applications business as whole, particularly against SAP. We believe that when the IT spending environment begins to improve Oracle will feel the benefits and come out strongly on the other side and we can't rule out the possibility that this improvement will come sooner than anticipated."

In other words, things aren't really that bad for Oracle, at least on a relative basis. It's certainly hard to see why the company should be worth 9 percent less today than on Friday.

But thanks for driving it down. You have kept Oracle's share price from getting ahead of itself, as it sometimes does. You are keeping Oracle, if not cheap, at least not overly expensive. That can only help its Wall Street performance in the long run. 22GO >